Making Informed Student Loan Decisions

The total cost of college can be overwhelming, and it can seem like your student will have no choice but to borrow, and borrow heavily, to complete a college education. Before taking on extensive student loan debt, consider these points so you and your student choose wisely.

Why It Matters

Without proper planning, repaying student loan debt with interest can be daunting.
Young adults with overwhelming student loan debt is in the news for a reason. High levels of borrowing without a workable plan to repay the debt can force new graduates into poor financial situations. With effective research and careful budgeting now and during college, a reasonable amount of loan debt can be managed after college.
Multiple options are available.
Your student’s financial aid offer may include federal PLUS loans for parents as part of the recommended aid package. The notification may imply that you or your student should borrow to cover any gap that remains after all financial aid is deducted from the actual costs your student will pay to attend. Before accepting such loans, you should be aware of other options to cover that gap and take a closer look at any suggestions the college offers, such as a payment plan option. Most importantly, do your research, such as exploring private loans offered by state-based, non-profit agencies, which are typically able to offer lower interest rates than other private loan providers, as well as the federal parent PLUS loan.

What Your Student Can Do Now

Consider ways to borrow less for college.
We recently shared some tips to borrow less for college (12^th Grade Feb. Article Two on your personal dashboard — How to Borrow Less to Pay for College). Earning more through work or scholarships, choosing less-expensive options, spending less on daily needs, and staying on track to graduate as quickly as possible are all ways to borrow less.
Learn about loan terms.
If your student isn’t aware of the meaning for terms like variable interest rate, fixed interest rate, annual percentage rate (APR), origination fees and accrued interest, this is the time to do a little research. Before committing to any student loans, your student should understand not only the amount that needs to be borrowed, but the amount that will need to be repaid later.
Investigate actual loan options.
While the federal government has student loans available, the limits on these likely won’t pay all costs for most programs. Your student should know options for private student loans and how to qualify for them. Then a comparison can be conducted to understand the best options.
Beware of teaser rates.
Your student should pay attention to lenders who advertise their loans based on rates as low as X%. What is frequently not disclosed is what credit standards are needed to qualify for these rates. Studies show that very few students actually receive them because they don’t meet the exceptional credit standards. Look for providers that publish their requirements to qualify for each of the interest rates offered for all loan products. Also check for prequalification tools that tell you your interest rate before applying for the loan.

What Your Student Can Do Later

Continue to watch finances.
As your student becomes more comfortable handling personal finances and living independently, it’s important to maintain the commitment to reducing costs. Loans often feel like an accepted and simple way to cover costs for items and experiences that are desired but may not be necessary; however, the goal is to graduate with as little debt as possible.
Make interest payments during school.
It’s not always possible, but making payments that at least cover accruing interest while in school can reduce the amount of debt your student will need to repay later on a starting salary. Once loans that have deferred payments enter repayment, any unpaid interest that accrued from the time the loan funds were sent to the school will capitalize, or be added to the principal balance, where it will then also begin to accrue more interest your student will need to repay.
Consider future employment that will help with student loan debt.
Some employers and programs offer assistance with student loan debt for employees who have earned a college degree or a program certificate. If your student is considering a career in health care, education or another service field, it may be worthwhile to look into loan forgiveness and repayment programs for serving in a high-need area. Employers are also adding student loan repayment benefits to attract candidates and retain staff.

What You Can Do

Consider other funding options.
When possible, consider helping your student with college costs from your own savings, earnings and assets. Some families are able to sell unnecessary assets to pay college expenses, while others tap into savings or find a way to increase earnings. Experts often recommend, however, that parents do not dip into retirement savings to pay for a child’s education. If you have a financial adviser, it would be beneficial to discuss options with that individual.
Compare other loans for parents to the federal PLUS loan.
While the federal parent PLUS loan doesn’t carry the same limits as federal student loans, the parent who takes out the loan becomes immediately responsible for repaying the debt. If you have moderate to good credit, you may be able to get a lower interest rate with a private loan that does not carry the fees of a PLUS loan. If you decide a private loan is right for your family, understand that these loans do not offer the same repayment options of the federal loans your student can take out, such as the subsidized and unsubsidized loans, which are included in the financial aid offer if the FAFSA was filed. Research private loan options very carefully and explore state-based non-profit organizations as a first step in finding low interest-rate loans. State-based non-profit organizations, such as ISL Education Lending and Minnesota Office of Higher Education, are often able to offer ranges of interest rates that are generally lower than those offered by other private student loan providers, as well as rates that are less than the federal parent PLUS Loan. Research loans offered by these organizations, as well as any residency requirements, by visiting www.foryounotforprofit.org. Our website provides the opportunity to order the College Financing Information Kit, which includes tips about choosing private loans, comparing loan options and making smart borrowing decisions.

Registration is still open through March 29 for a scholarship for Iowa high school students, not just seniors. The scholarship awards $1,000 College Savings Iowa deposits, which can be used when your student is ready to pay educational expenses. Register at www.IowaStudentLoan.org/ScholarshipSignUp.

Next Steps

Be sure to complete the survey questions at the end of this article to be entered into the 529 deposit giveaway!

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